As the construction industry slowly recovers from its harsh economic slump, many companies have opted to collaborate for joint ventures. This short-term endeavor can open a window of lasting opportunities for the involved parties to better compete as well as emerge into new markets. Doeren Mayhew’s construction CPAs note the preparation that needs to take place and a list of joint venture accounting rules to follow in order to ensure your joint venture goals are accomplished with few headaches along the way.
A joint venture is a collaborative effort between two or more persons or organizations for the purpose of adding business expertise for a specific project. From the involved parties arises a single subsidiary company developed for the project. This organization usually lasts a year or two and then diminishes. Some construction companies may lack sufficient capital, technical expertise or other resources needed to obtain the necessary contracts to thrive in today’s highly competitive environment. Joint ventures can help these companies compete with large construction conglomerates, venture into new markets and enjoy other benefits, such as:
While many construction companies that begin a joint venture have established a relationship prior to working together, it is still critical to do thorough research. In the midst of all of the changes and adjustments that come in joining with another firm, it is easy to overlook the small, yet pertinent information you should be assessing. A few key factors to evaluate include:
Most management and operational issues will be resolved with an attorney before the joint venture agreement. Roles and responsibilities should be clearly defined and concise so that any concerns arising during and after the project can be resolved. Within this agreement, the company with a larger and/or more sophisticated accounting department typically oversees the accounting for the engagement. However, relying on one company is not enough to ensure accounting records are being kept effectively. There are several joint venture accounting rules and guidelines that each party should know in order to accurately record their part in the venture as time progresses.
Recording Your Investment Wisely
In a joint venture, each company puts in capital, whether it’s funds or equipment. This capital is usually divided percentage wise (50 percent for each company or 70 percent and 30 percent, 40 percent and 60 percent, etc.) Once the joint venture begins, profits and losses come into play. It is critical that each party not just rely on the designated accounting company to facilitate and record all accounting information appropriately, but makes sure it records the investments on the individual balance sheets appropriately.
There are a few accounting consolidation methods that can be applied to a joint venture depending on the structure of the company and the capital each puts into the venture. This ensures that each company is appropriately recording its half of the joint venture on its consolidated financial statements for the subsidiary as a single entity. The three most commonly used methods are the equity, cost and proportionate consolidation methods:
Preparing Taxes Appropriately
Certain tax laws are applicable as well. Most joint ventures are structured as a limited liability company (LLC) and must abide by tax rules catering to those entities, including:
Preparation is key to success before, during and after a joint venture. To learn more about the above tips or other advice to help your joint venture run smoothly, contact our dedicated construction CPAs in Michigan or Houston.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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